When you sit down with an agent to design a long-term care insurance policy, you’re going to be asked to make some key decisions that will have a great effect on your coverage, possibly decades ahead of time.
Whatever company you select, some of the key decisions you’ll make involve setting an exclusion period, a maximum daily benefit, a benefit period, and deciding on inflation protection.
The First Factor
The first factor to consider is your own budget. Go into your search for a long term care policy expecting to keep the policy in force for decades. This means you want to get a policy that you can easily afford. A policy that you can’t afford is going to lapse, sooner or later. The second best policy that you can afford is better than the best policy that won’t be in place when the time comes and you need long term care.
The richer the benefits you get in a long term care policy, the higher your premiums will be. And because the policies are designed for a risk that will play out years from now, and may have to pay claims of as much as half a million dollars or more per claimant over a period of years, in some cases, even small changes in your policy can result in a major change in premiums.
Your exclusion period, also called your “waiting period,” is the number of days after the need becomes effective that you have to wait before the policy begins paying benefits. Among the items to consider: Medicare. Medicare does not provide significant long term care benefits. It only pays for nursing home care for the first 20 days after a qualifying hospitalization of at least three days. After that point, Medicare requires a coinsurance of $128 per day for the next 80 days. Medicare does not pay for nursing home benefits beyond that point, at all.
Depending on your savings, you may want to consider setting your long term care insurance exclusion period either close to 20 days, or close to 100 days. For example, a 30- or 90-day exclusionary policy dovetail fairly well with the Medicare benefit periods for nursing home care Granted, not every nursing home stay will be as a result of a qualifying hospitalization. But enough of them are that it’s worth paying some thought to coordinating your benefits with Medicare ahead of time.
Note: Some insurance companies, such as New York Life will provide a care coordinator to assist you or your family in lining up care from the day you make a claim. Sometimes these companies will lower the contractual exclusion period from 60, 90 or 120 days down to 20 days, if you make use of the care coordinator.
Maximum Daily Benefit
The cost of care varies substantially depending on your location. The 2012 Genworth Cost of Care survey breaks costs of care down to the state level. Across the board, the average cost of a semi-private room in a skilled care nursing facility was around $200 in 2011, and the average monthly cost of an assisted living facility was $3,300. But as with so many things, the cost of care is higher in places like New York City and Alaska.
Think about where you want to be when you reach the age at which you are most likely to need long term care. Where will you be? Do you want to be where you are now? Or where your adult children are? Is there a chance they will be living in an expensive area? Then you might want to shell out for a maximum daily benefit.
You may keep your long term care policy in force 30 or 40 years before you ever need it to pay a claim. That means inflation has a lot of time to wreak havoc on the cost of care. Over the years, long term care has increased in cost much faster than the rate of inflation, although that trend moderated in 2012. The long term inflation in the cost of care has generally been between 5 and 6 percent, compared to an overall inflation rate of 2 to 3 percent. This means that it is generally worth it to buy some inflation protection – either a 5 percent automatic annual increase in the max daily rate, or a CPI indexed inflation hedge – even if you need to roll back on your maximum daily rate to get it.
Length of Benefits
This is the number of years your policy will pay benefits. Some policies even offer an unlimited benefit. Others will max out at five or 10 years. The average nursing home stay is several years, and some 10 percent of those who enter the long term care system will require a stay of seven years or longer, according to the U.S. Department of Health and Human Services.
At the end of that period, you’ll start spending down your own resources, and those of your family. When those are exhausted, except for some exempt assets such as a limited amount of home equity and a bare minimum for a spouse, you will become a Medicaid patient. After you pass on, the state’s Medicaid Estate Recovery Program will seize your assets until the taxpayer has been reimbursed for any benefits paid on your behalf. To protect your assets, you may want to investigate your state’s Long Term Care Partnership Program. Generally, if you buy long term care benefits at least equal to your assets, the state will allow you to keep that amount of assets and still let you qualify for Medicaid once your long term care insurance benefits are exhausted. If you have a house or other assets you want to pass on to your children, this can be a key element in your overall estate plan.